Asymmetric effects of interest rate changes: the role of the consumption-wealth channel

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Abstract:

This article examines the role of the consumption-wealth channel in explaining asymmetric effects of monetary policy changes. Towards this end, we draw upon available literature on the consumption function and behavioural finance to construct a framework for asymmetric effects of monetary policy caused by the impact of wealth changes on aggregate consumption. We then employ data from the UK to examine the validity of the proposed framework. In the context of a liberalized economy with easy access to consumer credit, wealth reduction due to monetary tightening is expected to have weaker impact on spending than increase in wealth. Our results validate the above hypothesis.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840902950572

Affiliations: 1: Department of Economics,Curtin Business School, Perth WA 6845, Australia 2: Department of Accounting and Finance,Birmingham Business School, University of Birmingham, Birmingham B15 2TT, UK 3: Department of Accounting, ,Finance and Economics, Business School, University of Hertfordshire, HatfieldHerts AL10 9AB, UK

Publication date: June 1, 2011

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